Dubious Investments Further Imperil California Pension Plan Already in Crisis

pension-2The California Public Employee Retirement System, known as CalPERS, is in crisis. And it sure looks like things are going to get a whole lot worse before they can get a whole lot better.

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The system already has a $153 billion unfunded liability, one of the largest shortfalls of any state, and it only has funds to cover 68 percent of promised benefits into the future. And because CalPERS is already cash negative, paying out $5 billion more in benefits to retirees each year than it takes in, there aren’t many scenarios whereby the system would be able to make good on those promises absent outside intervention (read: taxpayer bailout).

Lawmakers and the fund’s board should be considering reforms to improve the system, but California voters and taxpayers faced another setback recently. Overseers of the pension plan — the nation’s largest — passed a funding plan earlier this year that projects shortfalls over the next decade but assumes rosy investment returns in coming decades to make up the difference. Given the high market valuations today, that assumption seems dubious.

When the CalPERS investment committee reallocated its investments recently, it assumed a 7 percent annualized rate of return. While CalPERS has enjoyed some good years — for example, its 2017 return may exceed 11 percent — that’s not the norm. The fund has averaged a 4.6 percent rate over the past decade, and its 2016 rate was an abysmal 0.6 percent.

CalPERS’ strategy — and to a large extent that of the state in general — seems crafted first and foremost to advance the interest of public sector labor unions. The high compensation for state government workers and the state’s munificent retirement benefits make it difficult for local government officials to find the money necessary to meet their obligations. Rising contribution rates for local governments mean that municipalities and schools have less money to educate children, build roads or provide other essential government functions.

CalPERS’s school district contribution rates to the pension plan are projected to skyrocket in the near future. The rates have risen to 15.5 percent from 11.8 percent in the 2015-2016 fiscal year, and are scheduled to reach 22.7 percent in 2020. School districts have little power to fight the increases, which are mandated at the state level. The only way to reduce pension contributions is to cut staff. Some layoffs may make sense for districts facing declining enrollment, but they can also harm educational outcomes.

Fund managers should be laser-focused on increasing investment returns for its beneficiaries, which would lessen the fund’s burden on taxpayers. But its board is more interested in pursuing a political agenda. For the majority of California taxpayers who hold a portion of their retirement assets in the stock market, CalPERS’ activism means that some of their money will be used to support a political agenda that hurts their investment returns.

CalPERS has played an increasing role in politicizing annual shareholder meetings in recent years. These elections are on the horizon—a majority of U.S. public companies hold the mandated meetings between March and July—and CalPERS is already planning to force votes on proposals on environmental and social issues.

Traditionally, these proxy votes have been about improving corporate governance with one goal in mind: improving shareholders’ returns. But CalPERS and other activist investors have aggressively pushed proposals irrelevant to companies’ missions that could have a harmful impact on shareholder value.

CalPERS has prioritized relatively poor-performing environmental, social and governance (ESG) investments at the expense of other options more likely to optimize beneficiary returns. As a recent study by the American Council for Capital Formation shows, four of CalPERS’ nine worst performing funds were ESG-focused.

CalPERS responded to the criticism by noting that the plan’s private equity portfolio, which includes the funds, has performed well overall. But CalPERS would serve its beneficiaries—and taxpayers—better if it focused on investment returns and not politics.

Making investment decisions based on social issues has real consequences. Last year CalPERS’ board expanded its ban on investing in companies that produce tobacco products, against recommendations by its professional staff. In an analysis of the cost of divestment produced for CalPERS, Wilshire Consulting placed the system’s total foregone investment gains at more than $3.6 billion.

CalPERS is facing a serious, long-term crisis that could cripple school districts and local governments while forcing tax increases to pay for the pension system. Getting the fund out of politics won’t alone fix the system’s fiscal woes. But it would be a good first step.


  1. Hey DUMB ASS BROWN, How is that getting rid of legal tax paying citizens for your Illegal Mexican trash working out for you??? You demwits have no idea what is coming your way in 2018…..All of you pathetic demits will be thrown out of office and then prosecuted for crimes against the state of California…

  2. Bill Macauley says

    December 18, 2017
    Communications & Stakeholder Relations
    Contact: Megan White, Information Officer
    (916) 795-3991 – newsroom@calpers.ca.gov
    The portfolio supports the existing plan to reach a seven percent discount rate
    SACRAMENTO, CA – The California Public Employee’s Retirement System Board of Administration today voted on the asset allocation of the Fund’s investment portfolio for the next four years. Of the four options under consideration, the Board selected the allocation of assets that is most similar to the current portfolio.
    “We’ve done significant analysis to get to this point,” said Henry Jones, chair of the Investment Committee. “After reviewing the Capital Market Assumptions, hearing from our stakeholders, and considering the recent change made last year in the discount rate, we feel that this portfolio represents our best option for success while protecting our investments from unnecessary risk.”
    As part of the Asset Liability Management (ALM) process, the Board examined four potential portfolios and their impact on the CalPERS Fund. Each portfolio represented different distributions of assets based on varying rates of expected return and risk of volatility. Ultimately, the staff recommended the portfolio with expected volatility of 11.4 percent and a return of 7 percent, which matches the December 2016 decision to lower the discount rate to 7 percent over the next three years. For comparison, the Fund’s net rate of returns since 1988 is 8.4 percent.
    “The Board heard employers’ concerns about the pressures of increased pension costs,” said Marcie Frost, CalPERS chief executive officer. “They balanced those concerns with making sure we are not taking on additional risk in the market and leaving the Fund more vulnerable during an economic downturn.”
    The new asset allocation will be distributed as follows:
    50% in Global Equity
    28% Fixed Income
    13% Real Assets
    8% Private Equity
    1% Liquidity
    Tomorrow, a committee of the Board will review the proposed economic and demographic actuarial assumptions as part of the ALM process and review of actuarial assumptions. The primary economic assumption under review is the discount rate that is determined after an asset allocation is selected.
    Demographic assumptions review life expectancy, retirement and disability rates, and changes in salaries. The most recent findings show that life expectancies for women remain generally unchanged from the last study in 2014, while men’s decreased on average by approximately 1 month. The review of assumptions also found that state CHP and Peace Officers and Firefighters are electing to retire earlier than expected. Public agency members subject to certain benefit formulas (PA Police 2% at 50 and 3% at 55 and PA miscellaneous 2% at 60) were also found to have retired earlier than expected. Most other public agency members show a slightly later retirement.
    While actuarial assumptions can affect employer and employee contribution rates, these new assumptions are not expected to have any substantial impact on rates.
    In making its decision, the Board reviewed recommendations from CalPERS team members, external pension and investment consultants, and input from employer and employee stakeholder groups.

  3. Bill Macauley says

    December 8, 2017
    Communications & Stakeholder Relations
    Contact: Amy Morgan, Information Officer
    (916) 795-3991 – newsroom@calpers.ca.gov
    Fiscal year 2016-17 Comprehensive Annual Financial Report now available
    SACRAMENTO, CA – The California Public Employees’ Retirement System released its annual financial report, which provides a detailed summary of the pension plan’s financial results and investment activities over a one-year period ending on June 30, 2017. The Comprehensive Annual Financial Report (CAFR) (PDF, 8.48 MB) presents an in-depth statistical analysis of pension and health finances of the System.
    “The significant accomplishments in this report affirm our commitment to fiscal responsibility,” said Marcie Frost, CalPERS chief executive officer. “The CAFR continues to serve as a measure of our commitment to accountability and transparency.”
    Significant data in the CAFR for fiscal year (FY) ending June 30, 2017:
    Investment assets stood at $326.4 billion for the Public Employees’ Retirement Fund (PERF). This is an increase of more than $24 billion in assets when compared with the previous fiscal year when assets reached $302 billion. Assets today are $344 billion.
    Net Investment returns in the PERF were 11.2 percent due to strong financial markets. Our Public Equity program returned 19.6 percent for the year.
    Overall investment expense costs decreased by $169.9 million.
    The funding level for the PERF was 68.3 percent as of June 30, 2016. As a result of the discount rate change from 7.5 percent to 7 percent through the three-year phase-in, the PERF funded status is estimated to hold at 68 percent for June 30, 2017. This estimate assumes a 7 percent discount rate that will be in effect in FY 2019-20 for the state and FY 2020-21 for schools and public agencies.
    The PERF paid $21.4 billion in annual pension benefit payments to nearly 670,000 retirees and beneficiaries — an increase of 3 percent from the previous fiscal year of nearly 650,000.
    Although the CAFR provides a comprehensive financial picture of the multidimensional CalPERS pension fund, more specific information regarding each of CalPERS’ contracting public agencies is available online in the June 30, 2016 Public Agency Actuarial Valuation Reports. These reports detail the financial status of each public agency pension plan and establish FY 2018-19 employer contribution rates for 2,945 contracting public agency employers.

  4. What could go wrong?
    Aggressive interest rate assumptions AND virtue-signaling investment restrictions!!!
    A sure recipe for success….
    For bankruptcy workout firms, perhaps….
    Cali is so done….

  5. As long as the members of the Pension Board use the “politically correct” criteria for making investments, the indebtedness will continue.

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